Pop!

Did I just hear the Chinese bubble bursting? I’m afraid so. And before it’s done deflating, we might hear a lot more: thunderous landslides, screams of panic, etc.

Alarmist? Maybe. But when the stakes are this high, even a “maybe” warrants genuine concern.

Of course, this bubble started with China’s mother of all stimulus plans in 2008/2009. Gordon Chang, an international lawyer and China analyst, has spent much of the past 30 years living and working in China. He puts it this way: by 2009 the Politburo had dumped about $1.1 trillion into a then $4.3 trillion economy. (He’s referring to an easing of lending, in addition to direct stimulus.)

These mind bogglingly huge inputs created growth, but also created a stock market bubble, a property bubble and inflation. And the faster something goes up, the faster it comes down.

How fast? Inflation, at a modest 1.5% in January 2010, rose to 6.5% by July 2011. But that’s just for starters.

The property agent, Homelink, reports that new home prices in Beijing dropped by 35% in November. You heard that right, folks. More than a third in a month. Another property agency, Centaline, estimates developers have 21 months of unsold inventory in Shanghai and 22 months in Beijing.

According to Gordon Chang, in mid-2010, the state electricity grid in China reported that 64.5 million apartments showed no electricity usage for more than six consecutive months. That’s enough housing for 200 million people. Most of it empty.

If these astronomical numbers don’t convince you, consider the surveys that show the rich and super rich in China are, in growing numbers, thinking of leaving the country. That means getting passports and ensconcing their families in comfortable Western cities. That’s what Gordon Chang calls a leading indicator.

If things are going pear shaped fast, what does it mean for us Aussies? To paraphrase and twist the old sin city adage, what happens in China doesn’t stay in China. The real estate collapse is already nailing the construction industry. Since mid-year, steel production in China is down about 15%. And where do we sell most of our iron ore? I don’t need to answer that, do I?

The big question is whether the Politburo can engineer a soft landing. But imminent political change in China isn’t helping. At the end of 2012, the Communist Party will start changing the members of the Politburo Standing Committee. Those guys are the top of the pops. And change means uncertainty, which means weakness, which means power struggles and so on.

So if we don’t get a soft landing and the real estate crisis spreads through the Chinese economy, contagion style, then it’ll be more than steel that tanks. Demand for commodities – our economic specialty – will go off a cliff, taking a chunk of our prosperity with it. Alarmist? I certainly hope so.

Andrew Pegler – 13 January 2012